Coffee prices behavior in the Indonesian market and its implication to derivatives pricing

Abstract

Indonesia is one of the main producers of agricultural commodities including coffee. Whereas the physical market of coffee in Indonesia, as a commodity, has been existed for centuries, the derivative market of coffee has just begun to appear recently as the result of demand growth for local market and export purpose. The paper market emerges as the outcome of the need of the producers, suppliers, and buyers to hedge against the risk of the availability and the prices volatility of coffee. In this growing commodity derivative market, it is important to examine the regular pattern and behavior of the coffee price for pricing purpose of its derivatives, especially in the specific case for the Indonesian market. This paper analyses the spot, futures, and option of coffee in Indonesia. The coffee spot price process is presented along with the parameters and its implication to derivatives pricing.